At the end of March 2018, the International Accounting Standards Board (IASB or Board) published its revised Conceptual Framework for Financial Reporting (Conceptual Framework). This new Conceptual Framework replaces its predecessor, which was issued back in 2010.
Who uses the Conceptual Framework?
The Conceptual Framework has a number of different uses. For instance:
Note that the Conceptual Framework is not a Standard in its own right and it also cannot override any existing IFRS Standard.
What changes have been made to the Conceptual Framework?
The Conceptual Framework was revised as the IASB felt that changes should be made in order to bring the 2010 Conceptual Framework up to date and to include new issues that weren’t previously covered.
As a result, there are a number of changes to be found in the revised Conceptual Framework. For example, there are new additions, with a new chapter on measurement, as well as new concepts related to presentation and disclosure and further guidance on when assets and liabilities should be removed from financial statements.
There have also been changes to the definitions of an asset and liability, as well as changes to the recognition criteria for recording assets and liabilities in financial statements.
Finally, the revised Conceptual Framework also includes clarifications in respect of items such as prudence, measurement uncertainty, and stewardship.
Some of the most significant changes have been the changes to the definitions of an asset and liability, as both definitions now refer to either a present economic resource, in the case of an asset, or an obligation to transfer an economic resource, in the case of a liability.
The term economic resource is new to the Conceptual Framework and is described as “a right that has the potential to produce economic benefits.”
This signals a move away from considering assets as being purely physical, and seems to be a move towards regarding assets as a bundle or collection of rights – a significant shift from the previous Conceptual Framework.
Additionally, when it comes to liabilities, there have been changes to when a liability would be recognised through a new “practical ability” approach. Specifically, in respect of a liability, the Conceptual Framework states that “an obligation is a duty or responsibility that the entity has no practical ability to avoid.” This may have an impact on when a company may bring a liability onto its balance sheet, and indeed it may raise initial questions as to how a company actually determines whether they have “no practical ability to avoid” a particular cost.
When will the revised Conceptual Framework come into effect?
The Conceptual Framework is effective immediately for the IASB as well as the IFRS Interpretations Committee. In respect of companies that use the Conceptual Framework to develop accounting policies, an effective date of 1 January 2020 has been given.
An accompanying document, Amendments to References to the Conceptual Framework in IFRS Standards, has also been released to help companies in transitioning over to the updated Conceptual Framework.
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